Every year about tax time, people begin to complain about the income tax system. Oh, we have to pay so much tax! It is so unfair! Those rich folks get all the breaks! Well, let's look at the alternative.
One proposal is a flat 20% tax on all earned income. People who are in the 10% and 15% tax brackets would see a large tax increase. Wealthy people with significant investment income and capital gains would see a drastic cut in their taxes. Fortunately, this plan has been defeated, and hopefully it will remain so.
Another proposal is the “fair tax” sponsored by Rep. John Linder. According to Mr. Linder, the FairTax Act of 2003 has gained support of several other law makers, including the House Majority Leader Tom DeLay.
The FairTax would place a 23% tax on all new goods sold. No one would have to file an income tax return. The IRS, along with all the thousands of pages of IRS rules and regulations, would be abolished. No federal taxes would be withheld from our pay checks. Social Security and Medicare would be paid out of sales tax revenue. Every one would receive a rebate of the sales tax equal to the spending up to the federal poverty level. Based on the 2003 guidelines, each family member would receive $465 a month to spend. Sounds good, doesn't it?
But wait a minute! Let's look at this proposal very carefully before we fire all our tax preparers and close down our CPAs. Look at your last year's tax return. What tax bracket are you in? 10%? 15%? Why would you want to pay 23%? Do you want to give up your earned income credit? Your child tax credit? Your education credit? What about all the other credits and deductions you normally receive? You will lose the deductions on your mortgage interest and property tax, your charitable contributions, and your unreimbursed employee expenses, just to name a few.
The main idea of the FairTax is that the more money you spend, the more tax you will pay, and it will be fair for everybody. Suppose you want to purchase a new home. Under the present tax system, normally, you would not be required to declare the sale or purchase of a new home. Under the FairTax, you would have to pay 23% sales tax on the purchase. A $100,000 home suddenly costs you $123,000, and there is no deduction on your income tax return. However, if you purchase an older home, you will pay no sales tax. What happens to the building industry that for so long has been the gauge for prosperity in this country?
Suppose you need a new car. Old Betsy just isn't as reliable as she used to be, and you saw that new SUV at the Chevy dealer. Wait a minute! If you purchase that new SUV, you will have to pay 23% sales tax, but if you buy that used station wagon on the lot down the street, you won't have to pay that tax. Pretty soon the new car industry is in trouble just like the building industry. What about the environment? If everybody is keeping his old clunker, how can the government enact laws to clean up the air and promote cleaner-burning fuel?
Under the present system, many food items are exempt from tax. However, under the FairTax, everything is taxed. You go into a grocery store to buy meat for the family. You pick up a beautiful rump roast that has a price tag of $14.00. You know that when you get to the checkout, you will have to pay an additional $3.22 for that roast. Maybe you won't get the roast this time. That ground meat doesn't look too bad, or maybe your family won't have any meat this week. Soon, nobody is buying rump roasts, and only a few are buying ground meat. Then the meat industry begins to suffer. What happens to the farmer now who can't sell his beef?
Large companies such as Wal-Mart will do well under the FairTax. They won't have to pay income tax on their profits; so they can afford to lower their prices. That cuts out all their competition. Soon there will be no more Mom-and-Pop businesses-only huge companies.
The people who would lose the most under the FairTax are seniors, the poor, and families. Seniors have reduced incomes and live off the savings they earned while they were working. They have already paid a lifetime of income taxes, and under FairTax, they will have the opportunity to pay taxes on that money again. The working poor usually pay little or no income taxes. Since they pay a larger percent of their income on consumption goods, they will have to pay a higher percentage of sales taxes. Under the FairTax, they would receive a check from the government each month to cover their necessities. Of course, the greater the allowance made for the poor, the higher the tax rate will be for everyone else. Under the present system, families have all sorts of credits and deductions that will be eliminated under the FairTax. Their standard of living will drop drastically. No one will be encouraged to rise above the poverty level. There will be no incentives to work-there is no earned-income credit. The FairTax will create a society of welfare recipients. You know the old adage “The rich get richer and the poor get poorer.” Under the FairTax that is exactly what will happen.
